Tuesday, May 24, 2011

Today's links

1--Beating a Dead QE2, The Streetlight blog

Excerpt: I thought I had suffered through enough of these types of stories over the past six months to last me a lifetime, but apparently not. Hasn't this innocent, blameless, and very dead horse been beaten sufficiently by now? And yet... some masochistic streak in me forces me to read it:

QE2 was a bust:
Economic data is worse than before

BOSTON (MarketWatch) — It‘s cost $600 billion of your money. And it was supposed to rescue the economy. But has Ben Bernanke’s huge financial stimulus package, known as “Quantitative Easing 2,” actually worked as planned?

QE2 is being wound down in the next few weeks. Fed Chairman Ben Bernanke has said it has left the economy “moving in the right direction.” But an analysis of the real numbers tells a very different story.

I've only snipped the first two paragraphs from this story, but that much is enough to contain two fundamental and oft-repeated errors which I've resisted commenting about in the past, but can resist no longer.

Correction #1. You can't tell if QE2 worked by simply looking at actual economic data. Why? Because you need to compare it to something. So in order to tell the effects of any particular policy you have to compare actual economic data with what would have happened in the absence of the policy. I have yet to see a critic of QE2 attempt to make the correct comparison.

Correction #2. QE2 didn't cost anything. Nothing. Nada. All that happened was that the Fed bought a bunch of long-term assets. The money didn't disappear. The Fed still has that $600 billion; it's just in the form of long-term bonds now.

2--The Importance of Fiscal Versus Monetary Stimulus, Wall Street Journal

Excerpt: Countries suffering balance-sheet recessions, like Japan faced during the 1990s and the U.S. and U.K. are struggling through now, need fiscal life support for a long time, he argues.

That’s because demand for the sort of credit that accompanies normal expansion is depressed. Households and banks want to rebuild their capital, so the former don’t want to borrow and the latter don’t want to lend. In this circumstance, aggregate demand remains below potential and the economy struggles until equilibrium is regained. That adjustment can take a decade or longer. During the past couple of years, the shortfall in aggregate demand was made up by massive amounts of government spending, everywhere.

So far the play book has been following Japan’s example. By 1996, the Japanese government was running a fiscal deficit of 5.2% as it tried to lift its economy out of the post-bubble doldrums, having steadily expanded the size of the shortfall from a surplus in 1992. GDP growth responded, rising from a muted 0.9% in 1994 to 2.6% in 1996. But then the Japanese government took fright at the size of the deficit it was running and raised sales tax the following year.

3--Beware the ‘Splash Crash’, Izabella Kaminska, FT.Alphaville

Excerpt: Introducing ‘the splash crash’.

Like the flash crash but worse because it involves the “flash” spreading cross-asset class to everything from forex to commodities.

The idea springs from John Bates, More…

Introducing ‘the splash crash’.

Like the flash crash but worse because it involves the “flash” spreading cross-asset class to everything from forex to commodities.

The idea springs from John Bates, the chief technology officer of Progress Software, as cited by Jim Mctague in Barron’s this week, and the worry is that investors currently do not appreciate the level of cross-asset algo-influence in the market.

As Mctague writes:

I’ve recently heard from a computer-trading expert warning of the very real possibility of a more widespread and catastrophic “splash crash,” a dislocation by high-speed trading computers that could simultaneously splash across many more asset classes and markets. Imagine our metaphorical jet buried in the earth up to its tail.

The possibility of a splash-crash nightmare springs from John Bates, the affable chief technology officer of Progress Software a $1.89 billion company whose worldwide headquarters is in Bedford, Mass. Bates has an impressive résumé, including a doctorate in computer science from Cambridge University. He’s also a member of a panel of technology experts that advises the Commodities Futures Trading Commission.

“I think there is an extreme risk of seeing this because we’re not serious about putting measures in place to police against it,” says Bates, who freely acknowledges that his company has computer programs that it would like to sell to securities and commodities regulators to address this very issue.

4--Housing Double Dip: Why Prices Will Keep Dropping, Fiscal Times

Excerpt: Before housing can recover, a couple of things have to happen. The first and most important is jobs. “The housing market will pick up when there are more jobs,” says Beth Larson, principal at Evermay Wealth Management. Second, foreclosures have to peter out and the market has to work through the excess housing inventory. “We have so many bad loans in the pipeline that are still going to go through the foreclosure process,” says Newport. “That’s going to continue to drive prices down.” More than 219,000 foreclosure filings were reported in April, and 1 in every 593 housing units is in foreclosure, according to RealtyTrac. Total housing inventory at the end of March rose 1.5 percent to 3.55 million existing homes available for sale, or about an 8.4-month supply, according to the National Association of Realtors.

Newport predicts that home prices will fall an additional 7 percent this year, while Capital Economics economist Paul Dales has them dropping at least 5 percent further. Zillow economist Stan Humphries says prices will bottom out sometime in 2012. In other words, the housing market still has a way to go before the worst is behind it....

5--Spain's Icelandic revolt, Press Europe

Excerpt: After passively submitting to the crisis, young Spaniards have finally taken to the street. Breaking out on the eve of municipal elections, the protests of recent days have been inspired by those in Iceland that led to the fall of the government in Reykjavik....

But those voices calling for real democracy are not just being raised in Iceland, a country of about 320,000 inhabitants. Here in Spain, the umbrella organisation for various Spanish movements – Democracia Real Ya (Real Democracy Now) – already lists among its proposals some 40 points ranging from controlling parliamentary absenteeism to reducing military spending through to abolishing the so-called Sinde law (a law restricting on-line infringements of copyright).

The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the "alternative globalisation" movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland.

All this is happening at astonishing speed via the Internet, which has amplified the echo of discontent and opened the lanes of cyberactivism to groups such as Anonymous, notable for intervening against companies like PayPal and Visa during the advocacy campaign for Wikileaks chief Julian Assange. Yet it was also there at the beginning of the revolts in the Arab world, to help people get round the censorship of the Tunisian and Egyptian dictatorships.

“When we grow up, we want to be Icelanders!" cried one of the leaders of the organisation during the march on Sunday May 15 before a column of young – and not so young – parents and children, students and workers, the jobless and pensioners. Many Saturdays in Iceland were needed before citizens won the changes they had demanded. Spain’s first Sunday has taken place, and was followed by a Tuesday [May 17]- but there’s still a long way to go.

6--Greece Bond Yields increase as Policymakers Disagree on Restructuring, Calculated Risk

From the Financial Times: ECB’s political tensions flare over Greece

This week, the ECB’s fierce opposition to Greece’s delaying debt repayments has erupted into a full-blown and public dispute. ... Jean-Claude Juncker, the Luxembourg prime minister who also chairs meetings of eurozone finance ministers, floated the idea of a “soft” restructuring ...In response, ECB policymakers accused him of “using meaningless phrases”.

7--Fed Fears of Wage Increases Carry Risks, Kathleen Madigan, Wall Street Journal via Economist's View

Excerpt: Windfall for commodity producers, no problem. Bigger paychecks for U.S. workers, now wait a minute…

That’s one reading of the minutes from the Federal Reserve‘s April 26-27 Federal Open Market Committee. The strategy makes sense from an economics’ standpoint; but it carries risks on both the political and growth fronts.

According to the minutes, Fed officials continue to think the impact from higher commodity prices will be “transitory.” The bigger concern would be if wage increases took hold. After all, labor remains the biggest expense for most U.S. businesses. If wages were to increase rapidly, companies would be under more pressure to raise their selling prices — which would cause workers to ask for bigger raises to cover the higher prices.

So far, the Fed sees little evidence of that inflationary cycle — mostly because there is so much slack in the labor markets. ... And as long as the pressures on labor costs remain muted, “a large, persistent rise in inflation would be unusual,” the minutes added. In other words, higher prices concentrated in energy and raw materials won’t bring a response from the central bank. But if wages pick up, the Fed may step in.

In theory, the policy is sound, given the dominance of labor costs to pricing decisions. ... But don’t expect the public to welcome the idea that wage gains need to remain “subdued.” The Fed could face more threats of greater oversight from Washington politicians if central bankers are seen as turning a deaf ear to the wants of working voters. Congressional meddling would complicate the Fed’s job.

Second, the price increases being tolerated by the Fed are wreaking havoc on household budgets. ... Without faster real income growth, consumers won’t provide the demand needed to power the recovery. Keeping the recovery going is another ball the Fed needs to keep juggling.

8--Making Things in America, Paul Krugman, New York Times via Economist's View

Excerpt: ...what’s driving the turnaround in our manufacturing trade? The main answer is that the U.S. dollar has fallen against other currencies, helping give U.S.-based manufacturing a cost advantage. A weaker dollar, it turns out, was just what U.S. industry needed.

Yet the Federal Reserve finds itself under intense pressure from the right to make the dollar stronger, not weaker. ...

And then there’s the matter of the auto industry, which probably would have imploded if President Obama hadn’t stepped in to rescue General Motors and Chrysler. ... And this ... would have undermined the rest of America’s auto industry, as essential suppliers went under, too. Hundreds of thousands of jobs were at stake.

Yet Mr. Obama was fiercely denounced for taking action. One Republican congressman declared the auto rescue part of the administration’s “war on capitalism.” Another insisted that when government gets involved in a company, “the disaster that follows is predictable.” Not so much, it turns out.

So while we still have a deeply troubled economy, one piece of good news is that Americans are, once again, starting to actually make things. And we’re doing that thanks, in large part, to the fact that the Fed and the Obama administration ignored very bad advice from right-wingers — ideologues who still, in the face of all the evidence, claim to know something about creating prosperity.

9--Let's demolish this poor housing policy, Dean Baker, The Guardian

Excerpt: The Obama administration's reform of Freddie Mac and Fannie Mae would merely subsidize mortgage middlemen with our taxes.....The more basic question is why the government feels the need to create a special financial system to subsidize housing....

However, the worse junk mortgages were not bought and securitised by Fannie and Freddie. These were packaged and sold by the investment banks, Goldman Sachs, Lehman, Citigroup and the rest. Fannie and Freddie got into junk mortgages late in the game, and even then, their primary motive was to regain lost market share. It had little to do with a desire to promote homeownership among moderate income households.

But even if Fannie and Freddie were not the primary culprits, the crisis and their collapse gives us a serious opportunity to rethink housing policy. Fannie Mae, when it was originally created in the Depression, served a useful purpose. It created a secondary market in mortgages, allowing banks to sell their mortgages and get the capital necessary to issue new mortgages. This reduced the disparity in interest rates across regions, ensuring that homebuyers had access to mortgages at a reasonable price....

Since we can use tax policy to make homeownership subsidies as generous as we want, why should the government also subsidise homeownership through a second channel in the financial system? Furthermore, even if the government were going to subsidise housing finance, why have the subsidy only apply to mortgage-backed securities?

The policy being considered by the Obama administration, which would guarantee the mortgage-backed securities issued by mini Fannie and Freddies, is effectively handing taxpayer dollars to the intermediaries in the housing finance process. That's a good policy if the point is to give taxpayer money to financial intermediaries; it makes zero sense as housing policy.

10--Goldman Braces for Federal Subpoenas, Housingwire

Excerpt: Goldman Sachs Group Inc. executives expect to receive subpoenas soon from U.S. prosecutors seeking more information about the securities firm's mortgage-related business, according to people familiar with the situation.

Officials at the New York company believe the Justice Department will demand certain documents and other information, possibly within days, these people said. Spokesmen for Goldman and the Justice Department declined to comment Thursday.

11--Can the Greek People Teach the Central Bankers Economics?, Counterpunch

Excerpt: The latest projections from the IMF show that Spain's GDP will not recover its pre-crisis peaks until 2013. It will take Ireland until 2015, and Portugal and Greece until 2016. Furthermore, given the consistent patterns of downgrading growth projections over the last few years, it is likely that it will take these countries even longer to regain their lost output on their current policy path.

This raises the possibility that governments of the heavily indebted countries will soon find it impossible to agree to the never-ending demands for austerity coming from the ECB and the IMF. The refusal to come to terms will inevitably lead to a financial crisis, as anyone with assets will seek to withdraw them from the banks of a country facing such a standoff.

In such circumstances, leaving the euro and re-introducing a domestic currency becomes a realistic prospect. No government would ever go this route unless it had no choice, because it is almost inconceivable that it could re-introduce a domestic currency without bringing on a financial crisis. However, if the crisis is already there, then the domestic currency route would suddenly look much more appealing.

Argentina provides the model for this situation. Its government had supposedly created an unbreakable peg between its currency and the dollar in the early '90s. When interest rates in the United States rose in the late '90s, and the value of the dollar rose as well, Argentina's situation became untenable....

If Greece were to leave the euro, there would undoubtedly be considerable short-term pain, but with its own currency it would at least have a route to resume growth in a reasonable period of time. Greece's departure would also pave a path for other countries to follow. This may be the lesson that the ECB needs in order to develop more realistic policies for dealing with the enormous imbalances that it allowed to develop in the last decade. Maybe the ECB bureaucrats can still learn some basic economics before they take Europe's economy even deeper into a hole.

12--Systematic Collapse, Total Assault On Culture

Excerpt: The current economic crisis is a combination of structural design and the inherent contradictions between the limitless search for profit, through speculation, and an interest-based economy in which production is dwindling, harbouring an excess of credit. The logic of the market, combined with neo-liberal doctrines, have brought it to the point where it is buoyed up on faith alone: capitalism is form of monotheism with its own attendant myths. The danger then comes then not when the fictitious bubbles burst, but when the very real infrastructure is sold off and dismantled. The threat is no longer fictitious, but historically realised through privatisation — a degradation of the social sphere and dispossession of people’s rightful common assets.

This is systemic, due to various documentable factors, not so much greed, as a naivety and faith in partially understood market processes. What has changed between now and since the mid-seventies is that risks are more evenly spread so that devaluations are visited on the poorest and least able to bear them. The middle-classes, co-opted by conservative rhetoric and in cahoots with finance, divested the working-classes during previous profit squeezes. In effect, they saw them as the principle barrier to profitability during previous contractions and in effect abetted a return of power to the ruling-classes, rather than see a more horizontal distribution of wealth.

Firstly, we should understand the system as an organic one, that mutates spasmodically to circumvent crises brought about by its own internal contradictions. It is a process of motion and fluidity and moreover it’s a system of relations. Capital is no longer capital if it is not moving; it becomes inert. And when things stop, value disappears. Money, most importantly, is the lubricant of this exchange (liquidity).

It is not a lack of money that causes a crisis, but on the contrary, it is the crisis that causes a lack of money. Liquidity and capital are not the same thing. There is a crisis in the overaccumulation of capital (as represented by the habouring of an excess of bad credit in the system, and as we know: bad money drives out good). It is exactly because of the ‘flood’ of finance capital of unknown quality that there is a crisis of liquidity. The crisis of overaccumulation brings about limits to the flow of capital, i.e. stasis in the money markets.

The liquidity crisis is very real and is causing, or about to cause, a huge shortage in the means of payment. All loans and debts are being called in, in return for money. The next phase — as banks refuse to extend lines of credit to businesses in the real economy and the demand for loanable funds drives up interest — is that ordinary working people get sacrificed on the altar of capitalist irrationality. Then comes inflation as a form of devaluation and the subsequent wage struggles that precede a rise in class consciousness.

This crisis will not remain in the world of finance for very much longer.

No comments:

Post a Comment